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NIXON PEABODY WINS L'OREAL PRODUCT DIVERSION CASE
Congratulations to Scott O'Connell, Dave Ruoff, Lee Ann Ward and Cheri Noonan for their defense verdict after a week long liability only trial representing L'Oreal USA.
Plaintiff Hair Excitement Inc., owner of 21 hair salons in New Hampshire, Maine and Massachusetts, sued L'Oreal USA claiming $10 million in damages arising from the termination of salon-only product sales to Hair Excitement. Products included Redken 5th Avenue and Matrix/Biolage.
L'Oreal terminated sales following an investigation that included having an undercover agent purchase a large quantity of luxury products from Hair Excitement for resale into the gray market where discounters buy these high-end products.
Hair Excitement claimed that L'Oreal's conduct was pretextual and amounted to entrapment, deception and deceit in violation of New Hampshire's consumer protection statute for which treble damages and attorneys' fees are available.
L'Oreal has been combatting the costly issue of product diversion into gray markets on many fronts. The Court described the problem this way:
"The diversion of product, and in particular product designed and marketed for salon-only sales, is a very large problem in the beauty supply industry.
"Manufacturers are constantly battling this problem, which harms the business reputations of both the manufactures and the salon owner, which creates a mistaken impression that the manufacturer permits or endorses the sale of salon-only products outside of a professional salon setting, and which is likely to cause confusion concerning the quality of salon-only products.
"Among the few tools available to manufacturers to battle diversion are tips from informants, coding of product to track the product’s distribution routes, and buying programs, known at L’Oreal as 'loyalty tests'.
"Buying programs or loyalty tests involve the manufacturer sending in an investigator to pose as someone other than a consumer purchasing for the consumer’s own use, and are generally used by a manufacturer to confirm whether a salon reported to be reselling in violation of contracts is in fact doing so.
"Both the problem and the tools used by manufacturers to combat it are well known and well understood by those involved in the industry.
"Given this state of the beauty supply industry, L’Oreal did what is well understood in the industry and what made sense to do in this case: It charged an investigator with approaching Hair Excitement to find out if Hair Excitement would sell a quantity of Redken and Matrix product to someone who was not a legitimate Hair Excitement salon client for that client’s home maintenance use or not a consumer purchasing for the consumer’s own use, which Hair Excitement did."
The court, sitting without a jury, returned a defense verdict for L'Oreal.